MARKET COMMENT
Prepare For Market Volatility

By Maynard Paton (TMFMayn)
August 10, 2004

So far this year, the FTSE All-Share index has produced a -1% return with dividends reinvested. Thankfully, stock market history suggests such mundane performances are rarely prolonged. Investors should therefore prepare for the return of market volatility.

A hundred years ago, a dull stock market was the order of the day. According to Credit Suisse First Boston's 2004 Equity-Gilt study, during the 36-year period between 1874 and 1909, there were 21 occasions when the market produced an annual return within 5% either way of zero.

But since the end of 1945, shares have become more of a roller coaster ride. This table summarises the frequency and size of the stock market's (nominal) annual performances during the past 58 years.

The CSFB data indicates post-war investors were more likely than not to experience a 15%-plus gain or fall in any given year. Only one year in six -- the last being 1976 -- did the market produce a total annual return within plus or minus 5%. And in just two periods, 1947-1948 and 1960-62, did investors witness shares largely standstill in more than one consecutive year.

So, if 2004 eventually 'rewards' stock pickers with what looks to be a rather overdue humdrum market, which way will shares turn next? Well, looking back at the 10 occurrences of pedestrian annual returns since 1945, two were followed by declines while eight heralded advances (some of which were quite sizeable). No guarantees of course, but volatile -- and most likely positive -- market movements seem to be on the horizon.

Regular contributions to an index tracker can smooth out the market's ups and downs. Since 1945, the stock market has generated an 11% annual average return, handsomely beating cash and gilts.